Apple and Wal-Mart: Bargaining on your behalf for lower prices

Even though Apple products are expensive, there’s a surprising similarity between Apple and Wal-Mart: both companies push hard on other parts of the value chain to deliver lower prices for consumers.

In Walmart’s case, it’s generally suppliers who get squeezed. Walmart demands that manufacturers of goods produce them at the lowest possible price so that Walmart can charge the lowest prices in their stores. They really do try hard to pass the savings on to you. Another case that is less well known is with so-called “interchange” fees for debit and credit cards, charged by the card networks like Visa and Mastercard. Back in 2003, Walmart pushed hard on Visa and Mastercard to charge less for debit card transactions since they are both lower risk (because of pin-code use) and cheaper to process (verifying signatures is expensive). The cynical will point out that with lower fees, Walmart just gets to keep more profit. Which is true. But they are genuinely motivated to lower prices for consumers, since that’s their main selling point. So it’s a win-win — Wal-Mart’s motivations to lower costs are closely aligned with consumer’s desires to pay less.

Apple has similar desires for their network-connected gadgets like iPhones and iPads. Apples wants people to be able to connect their devices to the network for as little as possible. Apple has clearly negotiated very hard with AT&T to demand low monthly rates on data plans for these devices. Next month you’ll be able to buy an iPad with a 3G data plan for just $15 / month. That is basically unheard of in the US. For people on a limited budget, the iPad is the cheapest way to get online. Compare this to other data plans available from major U.S. carriers:

Provider

Plan Type

Monthly data limit

Monthly fee

AT&T

Smartphone

unlimited

$50

+ voice plan

Tmobile

Blackberry data

unlimited

$50

+ voice plan

Tmobile

Smartphone data

unlimited

$50

+ voice plan

Tmobile

Smartphone data

200 MB

$30

+ voice plan

Verizon Wireless

Smartphone data

unlimited

$30

+ voice plan

Apple / AT&T

iPhone

unlimited

$30

+ voice plan

.

Verizon Wireless

Laptop tether to smartphone

5 GB

$60

+ voice plan

AT&T

Laptop tether to smartphone

5 GB

$60

+ voice plan

Verizon Wireless

3G card / laptop

5 GB

$60

AT&T

3G card / laptop

5 GB

$60

Tmobile

3G card / laptop

5 GB

$60

Apple / AT&T

iPad

unlimited

$30

.

Verizon Wireless

3G card / laptop

250 MB

$40

AT&T

3G card / laptop

200 MB

$35

Apple / AT&T

iPad

250 MB

$15

.

The Apple / AT&T rates are the lowest in each of their categories, except Verizon’s smartphone data plan which ties the AT&T iPhone plan. The iPad rates are extremely low compared to data plans for laptops, and also when when you consider that tethering plans or phone data plans require paying an extra $30/mo – $50/mo for a voice plan. The unlimited iPad plan is literally half what it costs to get 3G on any other laptop, and it doesn’t come with the 5 GB limit that other plans do. You might argue that the iPad can’t do as much as a full laptop, which is true. So you might then argue that iPad won’t tax the network as much as a laptop, which I doubt considering the propensity to consume video on such a device. So you can’t trade torrents on an iPad, which from an Intellectual Property perspective is just fine with me.

My guess (and this is pure speculation) is that Apple negotiated these rates by offering AT&T a share of the revenues generated through App Store purchases.

Again, the cynical will point out that Apple is just trying to grab the lion’s share of economic surplus for itself, which is true. But nonetheless, this is a case where Apple’s desires and our desires as consumers line up well. In a very real way, Apple is fighting on our behalf for lower prices from AT&T.

This entry was posted
on Tuesday, April 20th, 2010 at 7:29 AM and is filed under Analysis, Apple, Business, Economics, Gadgets, Geek.
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